Dividend Income in a TFSA: Why I Love This Tax-Free Setup

If you don’t like paying tax on your passive income, use this tax-free set up in your TFSA to generate a safe, steady stream of dividends.

Robin Brown

Author Bio

Robin Brown has been a regular contributor to The Motley Fool Canada since January 2020. He began investing in 2009, during the depths of the global financial crisis, and has continued to refine his approach over the years. His investment philosophy emphasizes patience, quality, and identifying businesses with the potential to create lasting value. Robin currently lives in St. Albert, Alberta, where he manages a portfolio of Western Canadian industrial properties and private investments. Having lived in Canada, Norway, and Australia, he brings a broad perspective to his work and investing. Outside of work, Robin enjoys traveling, hiking, hunting, fishing, biking, and cooking for his wife, two daughters, and son.

Education

Bachelor's degree in Theology
Advanced Diploma in Business Management

Areas of Expertise

Dividend investing, value investing, quality stocks, small-cap stocks, long-term investing, business fundamentals, balance sheet analysis, capital allocation, industrial real estate, and private investments.

Social Media Profiles

Favorite Investment Quote

"Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." — Warren Buffett

Published November 5, 8:00 pm EST

If you don’t like paying tax on your dividend income, holding Canadian dividend stocks inside a Tax-Free Savings Account (TFSA) can be a smart move. All income earned in the TFSA is tax-free, giving you the choice to completely reinvest your payments or withdraw them tax-free.

The simple strategy of putting your Canadian dividend stocks inside your TFSA can increase your annual returns by 5% to 15% per year. If I were looking to set up a dividend portfolio in my TFSA, I would structure it with these four diverse Canadian stocks.

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Fortis: A perfect TFSA anchor

Fortis (TSX: FTS) is the perfect anchor for any TFSA portfolio. Not many companies in Canada have a 53-year record of annually increasing its dividend. It just raised its dividend by 4%.

It speaks to how well this company is run. Fortis recently announced an updated $32.2 billion capital plan that should sustain the coming five years with 7.5% compounded annual rate base growth. Power demand is rising and Fortis has the essential infrastructure to support that growth.

Fortis yields 3.2%. It continues to aim for 4–6% compounded annual dividend growth ahead.

Cenovus: A top energy stock

Energy stocks have been falling back on fears that the Middle East conflict will soon abate. The pullback could be an opportunity. Cenovus Energy (TSX: CVE) is on its way to becoming the second largest energy producer in Canada. It has consolidated several oil sands and thermal oil producers.

Today, it produces over 1 million barrels of oil per day. It also is a major refiner in North America. With elevated energy prices, it is enjoying strong cash returns.

CVE stock pays a 2.2% dividend yield today. It has grown its dividend by 1,300% since it was suspended briefly in 2020. Cenovus trades at a discount to other integrated energy peers, so it offers great value.

Granite REIT: A solid TFSA monthly income play

If you want to own real estate, Granite Real Estate Investment Trust (TSX: GRT.UN) is ideal for a TFSA. Granite has institutional-quality logistics, warehousing, and manufacturing properties in Canada, the U.S., the U.K. and Europe.

The REIT sits with 97% occupancy and a weighted average lease term of five years. It operates with modest debt (32% leverage ratio), which has provided substantial flexibility to be opportunistic in acquisitions or complete unit buybacks.

Granite stock yields 4.1%. It just increased its monthly distribution by over 4%. That will be its 16^th consecutive annual distribution increase!

Pembina Pipeline: An infrastructure growth opportunity

Pembina Pipeline (TSX: PPL) is another great TFSA stock. It operates a crucial network of pipelines and midstream facilities in Western Canada.

Over 85% of its income is contracted. Its contracted income widely supports its dividend payout ratio. Pembina generates a strong stream of free cash flow, which it is investing in various growth projects including an LNG terminal, a data centre power plant, an ethane extraction plant, and potentially a pipeline from Alberta to the West Coast.

Pembina sits at the crossroads of many exciting investment themes. It pays a 4.3% dividend yield. Pembina has increased its dividend every year since 2022. For a mix of low-risk growth, it is a great stock to hold for tax-free TFSA income.